ACME SHOE, RUBBER & PLASTIC CORPORATION and CHUA PAC vs. HON.

COURT OF APPEALS

Facts:
Petitioner Chua Pac, the president and general manager of co-petitioner "Acme Shoe, Rubber &
Plastic Corporation," executed for and in behalf of the company, a chattel mortgage in favor of private
respondent Producers Bank of the Philippines. The mortgage stood by way of security for petitioner's
corporate loan (P3,000,000.00). A provision in the chattel mortgage agreement was to this effect:
If the MORTGAGOR, his heirs, executors or administrators shall well and truly perform the full
obligation or obligations above-stated according to the terms thereof, then this mortgage shall be
null and void.
"In case the MORTGAGOR executes subsequent promissory note or notes either as a renewal of the
former note, as an extension thereof, or as a new loan, or is given any other kind of accommodations
such as overdrafts, letters of credit, acceptances and bills of exchange, releases of import shipments
on Trust Receipts, etc., this mortgage shall also stand as security for the payment of the said
promissory note or notes and/or accommodations without the necessity of executing a new contract
and this mortgage shall have the same force and effect as if the said promissory note or notes and/or
accommodations were existing on the date thereof. This mortgage shall also stand as security for
said obligations and any and all other obligations of the MORTGAGOR to the MORTGAGEE of
whatever kind and nature, whether such obligations have been contracted before, during or
after the constitution of this mortgage.”

In due time, the loan of P3,000,000.00 was paid by petitioner corporation. Subsequently, in 1981, it
obtained from respondent bank additional financial accommodations totalling P2,700,000.00. These
borrowings were on due date also fully paid.
The bank yet again extended to petitioner corporation a loan of (P1,000,000.00) covered by four
promissory notes for P250,000.00 each. Due to financial constraints, the loan was not settled at maturity.
Respondent bank thereupon applied for an extrajudicial foreclosure of the chattel mortgage with the Sheriff
of Caloocan City, prompting petitioner corporation to forthwith file an action for injunction, with damages
and a prayer for a writ of preliminary injunction, before the Regional Trial Court of. Ultimately, the court
dismissed the complaint and ordered the foreclosure of the chattel mortgage. It held petitioner corporation
bound by the stipulations, aforequoted, of the chattel mortgage.
Petitioner corporation appealed to the Court of Appeals which affirmed, "in all respects," the
decision of the court a quo.

Issue: Whether or not it would be valid and effective to have a clause in a chattel mortgage that purports
to extend its coverage to obligations yet to be contracted or incurred.

Held: NO.
Contracts of security are either personal or real.
In contracts of personal security, such as a guaranty or a suretyship, the faithful performance of the
obligation by the principal debtor is secured by the personal commitment of another (the guarantor or
surety).
In contracts of real security, such as a pledge, a mortgage or an antichresis, that fulfillment is secured
by an encumbrance of property — in pledge, the placing of movable property in the possession of the
creditor; in chattel mortgage, by the execution of the corresponding deed substantially in the form
prescribed by law; in real estate mortgage, by the execution of a public instrument encumbering the real
property covered thereby; and in antichresis, by a written instrument granting to the creditor the right to
receive the fruits of an immovable property with the obligation to apply such fruits to the payment of
interest, if owing, and thereafter to the principal of his credit — upon the essential condition that if the
principal obligation becomes due and the debtor defaults, then the property encumbered can be alienated
for the payment of the obligation, but that should the obligation be duly paid, then the contract is
automatically extinguished proceeding from the accessory character of the agreement. As the law so puts
it, once the obligation is complied with, then the contract of security becomes, ipso facto, null and void.
While a pledge, real estate mortgage, or antichresis may exceptionally secure after-incurred
obligations so long as these future debts are accurately described, a chattel mortgage, however, can only
cover obligations existing at the time the mortgage is constituted. Although a promise expressed in a chattel
mortgage to include debts that are yet to be contracted can be a binding commitment that can be compelled
upon, the security itself, however, does not come into existence or arise until after a chattel mortgage
agreement covering the newly contracted debt is executed either by concluding a fresh chattel mortgage or
by amending the old contract conformably with the form prescribed by the Chattel Mortgage Law. Refusal on
the part of the borrower to execute the agreement so as to cover the after-incurred obligation can constitute
an act of default on the part of the borrower of the financing agreement whereon the promise is written but,
of course, the remedy of foreclosure can only cover the debts extant at the time of constitution and during
the life of the chattel mortgage sought to be foreclosed.

A chattel mortgage must comply substantially with the form prescribed by the Chattel Mortgage Law
itself. One of the requisites, under Section 5 thereof, is an affidavit of good faith. While it is not doubted that
if such an affidavit is not appended to the agreement, the chattel mortgage would still be valid between the
parties (not against third persons acting in good faith), the fact, however, that the statute has provided that
the parties to the contract must execute an oath that:
". . . (the) mortgage is made for the purpose of securing the obligation specified in the conditions
thereof, and for no other purpose, and that the same is a just and valid obligation, and one not
entered into for the purpose of fraud.”

makes it obvious that the debt referred to in the law is a current, not an obligation that is yet merely
contemplated.
In the chattel mortgage here involved, the only obligation specified in the chattel mortgage contract
was the P3,000,000.00 loan which petitioner corporation later fully paid. By virtue of Section 3 of the Chattel
Mortgage Law, the payment of the obligation automatically rendered the chattel mortgage void or
terminated.

OLIVIA M. NAVOA and ERNESTO NAVOA vs. COURT OF APPEALS, TERESITA DOMDOMA and EDUARDO
DOMDOMA

Facts:
On 17 December 1977 private respondents filed with the Regional Trial Court of Manila an action
against petitioners for collection of various sums of money based on loans obtained by the latter. On 3
January 1978 petitioners filed a motion to dismiss the complaint on the ground that the complaint stated no
cause of action and that plaintiffs had no capacity to sue.
After private respondents submitted their opposition to the motion to dismiss on 9 January 1978 the
trial court dismissed the case. A motion to reconsider the dismissal was denied.
On 27 March 1978 private respondents appealed to the Court of Appeals which on 11 December
1980 modified the order of dismissal "by returning the records of this case for trial on the merits.”
Petitioners submit that private respondents failed to specify in their complaint a fixed period within
which petitioners should pay their obligations; that instead of stating that petitioners failed to discharge their
obligations upon maturity private respondents sought to collect on the checks which were issued to them
merely as security for the loans; and, that private respondents failed to make a formal demand on petitioners
to satisfy their obligations before filing the action.

Issue: Whether or not the complaint should be dismissed for lack of cause of action.
Held: NO.
A cause of action is the fact or combination of facts which affords a party a right to judicial
interference in his behalf. The requisites for a cause of action are: (a) a right in favor of the plaintiff by
whatever means and under whatever law it arises or is created, (b) an obligation on the part of the defendant
to respect and not to violate such right; and, (c) an act or omission on the part of the defendant constituting
a violation of the plaintiff's right or breach of the obligation of the defendant to the plaintiff.
In determining the existence of a cause of action, only the statements in the complaint may properly
be considered. Lack of cause of action must appear on the face of the complaint and its existence may be
determined only by the allegations of the complaint, consideration of other facts being proscribed and any
attempt to prove extraneous circumstances not being allowed.

In their first cause of action private respondents Eduardo and Teresita Domdoma alleged that
petitioner Olivia Navoa obtained from the latter a ring valued at P15,000.00 and issued as security therefor a
check for the same amount dated 15 August 1977 with the condition that if the ring was not returned within
fifteen (15) days the ring would be considered sold; and, after the lapse of the period, private respondent
Teresita Domdoma asked to deposit the check but petitioner Olivia Navoa requested the former not to
deposit it in the meantime; that when Teresita Domdoma deposited the check after holding it for sometime
the same was dishonored for lack of funds. Private respondent Teresita Domdoma sought to collect the
amount of P15,000.00 plus interest from 15 August 1977 until fully paid.
From these facts the ring was considered sold to petitioner Olivia Navoa 15 days from 15 August
1977 and despite the sale the latter failed to pay the price therefor even as the former was given ample time
to pay the agreed amount covered by a check. Clearly, respondent Teresita Domdoma's right under the
agreement with petitioner Olivia Navoa was violated by the latter.

In the second to the sixth causes of action it was alleged that private respondents granted loans to
petitioners in different amounts on different dates. All these loans were secured by separate checks intended
for each amount of loan obtained and dated one month after the contracts of loan were executed. That
when these checks were deposited on their due dates they were all dishonored by the bank. As a
consequence, private respondents prayed that petitioners be ordered to pay the amounts of the loans
granted to them plus one percent interest monthly from the dates the checks were dishonored until fully
paid.
Culled from the above, the right of private respondents to recover the amounts loaned to petitioners
is clear. Moreover, the corresponding duty of petitioners to pay private respondents is undisputed.

All the loans granted to petitioners are secured by corresponding checks dated a month after each
loan was obtained. In this regard, the term security is defined as a means of ensuring the enforcement of an
obligation or of protecting some interest in property. It may be personal, as when an individual becomes a
surety or a guarantor; or a property security, as when a mortgage, pledge, charge, lien, or other device is
used to have property held, out of which the person to be made secure can be compensated for loss. Security
is something to answer for as a promissory note. That is why a secured creditor is one who holds a security
from his debtor for payment of a debt. From the allegations in the complaint there is no other fair inference
than that the loans were payable one month after they were contracted and the checks issued by petitioners
were drawn to answer for their debts to private respondents.
Petitioners failed to make good the checks on their due dates for the payment of their obligations.
Hence, private respondents filed the action with the trial court precisely to compel petitioners to pay their
due and demandable obligations. Art. 1169 of the Civil Code is explicit — those obliged to deliver or to do
something incur in delay from the time the obligee judicially or extrajudicially demands from them the
fulfillment of their obligation. The continuing refusal of petitioners to heed the demand of private
respondents stated in their complaint unmistakably shows the existence of a cause of action on the part of
the latter against the former.

PEOPLE OF THE PHILIPPINE ISLANDS vs. VENANCIO CONCEPCION

Facts:
"Puno y Concepcion, S. en C." was a copartnership capitalized at P100,000. Anacleto Concepcion
contributed P5,000; Clara Vda. de Concepcion, P5,000; Miguel S. Concepcion, P20,000; Clemente Puno,
P20,000; and Rosario San Agustin, "casada con. Gral. Venancio Concepcion," P50,000. Member Miguel S.
Conception was the administrator of the company.
By telegrams and a letter of confirmation to the manager of the Aparri branch of the Philippine
National Bank, Venancio Conception, President of the Philippine National Bank, between April 10, 1919, and
May 7, 1919, authorized an extension of credit in favor of "Puno y Conception, S. en C." in the amount of
P300,000.
This special authorization was essential in view of the memorandum order of President Conception
dated May 17, 1918, limiting the discretional power of the local manager at Aparri, Cagayan, to grant loans
and discount negotiable documents to P5,000, which, in certain cases, could be increased to P10,000.
Pursuant to this authorization, credit aggregating P300,000, was granted the firm of "Puno y Conception, S.
en C.," the only security required consisting of six demand notes. The notes, together with the interest, were
taken up and paid by July 17, 1919.
Venancio Concepcion, as President of the Philippine National Bank and as member of the board of
directors of this bank, was charged in the Court of First Instance with a violation of section 35 of Act No.
2747. He was found guilty by and was sentenced to imprisonment for one year and six months, to pay a fine
of P3,000, with subsidiary imprisonment in case of insolvency, and the costs.
Section 35 of Act No. 2747 reads as follows:
"The National Bank shall not, directly or indirectly, grant loans to any of the members of the board of
directors of the bank nor to agents of the branch banks.”
Section 49 of the same Act provides:
"Any person who shall violate any of the provisions of this Act shall be punished by a fine not to
exceed ten thousand pesos, or by imprisonment not to exceed five years, or by both such fine and
imprisonment.”

Issue: Whether or not the granting of 300,000 is a loan which is prohibited under the aforementioned act.

Held: YES
The "credit" of an individual means his ability to borrow money by virtue of the confidence or trust
reposed by a lender that he will pay what he may promise. A "loan" means the delivery by one party and the
receipt by the other party of a given sum of money, upon an agreement, express or implied, to repay the sum
of money, with or without interest. The concession of a "credit" necessarily involves the granting of "loans"
up to the limit of the amount fixed in the "credit.”
Discounts are favored by bankers because of their liquid nature, growing, as they do, out of an
actual, live transaction. But in its last analysis, to discount a paper is only a mode of loaning money, with,
however, these distinctions: (1) In a discount, interest is deducted in advance, while in a loan, interest is
taken at the expiration of a credit; (2) a discount is always on double-name paper; a loan is generally on
single-name paper.
Conceding, without deciding, that, as ruled by the Insular Auditor, the law covers loans and not
discounts, yet the conclusion is inevitable that the demand notes signed by the firm "Puno y Concepcion, S.
en C." were not discount paper but were mere evidences of indebtedness, because (1) interest was not
deducted from the face of the notes, but was paid when the notes fell due; and (2) they were single-name
and not double-name paper.
 REPUBLIC OF THE PHILIPPINES vs. PHILIPPINE NATIONAL BANK

Facts:
The Republic of the Philippines filed a complaint for escheat of certain unclaimed bank deposits
balances under the provisions of Act No. 3936 against several banks, among them the First National City Bank
of New York.
It is alleged that pursuant to Section 2 of said Act defendant banks forwarded to the Treasurer of the
Philippines a statement under oath of their respective managing officials of all the credits and deposits held
by them in favor of persons known to be dead or who have not made further deposits or withdrawals during
the period of 10 years or more.
In its answer the First National City Bank of New York claims that, while it admits that various savings
deposits, pre-war inactive accounts, and sundry accounts contained in its report submitted to the Treasurer
of the Philippines pursuant to Act No. 3936, totalling more than P100,000.00, which remained dormant for 10
years or more, are subject to escheat, however it has inadvertently included in said report certain items
amounting to P18,589.89 which, properly speaking, are not credits or deposits within the contemplation
of Act No. 3936. Hence, it prayed that said items be not included in the claim of plaintiff.
After hearing the court a quo rendered judgment holding that cashier's or manager's checks and
demand drafts as those which defendant wants excluded from the complaint come within the purview of Act
No. 3936, but not the telegraphic transfer payment orders which are of different category.
After a motion to reconsider was filed by defendant, the court a quo changed its view and held that
even said demand drafts do not come within the purview of said Act and so amended its decision
accordingly.

Section 1, Act No. 3936, provides:

"SECTION 1. 'Unclaimed balances' within the meaning of this Act shall include credits or
deposits of money, bullion, security or other evidence of indebtedness of any kind, and interest
thereon with banks, as hereinafter defined, in favor of any person unheard from for a period of ten
years or more. Such unclaimed balances, together with the increase and proceeds thereof, shall be
deposited with the Insular Treasurer to the credit of the Government of the Philippine Islands to be
used as the Philippine Legislature may direct.”

It would appear that the terms "unclaimed balances" that are subject to escheat include credits or
deposits of money, or other evidence of indebtedness of any kind, with banks, in favor of any person unheard
from for a period of 10 years or more.

Issue:
1. Whether or not the demand drafts in the case at bar are credits that are subject to escheat
proceedings.
2. Whether or not the telegraphic orders in the case at bar are credits that are subject to escheat
proceedings.

Held:
1. NO.
As correctly stated by the trial court, the term "credit" in its usual meaning is a sum credited on the
books of a company to a person who appears to be entitled to it. It presupposes a creditor-debtor
relationship, and may be said to imply ability, by reason of property or estates, to make a promised payment.
 To begin with, we may say that a demand draft is a bill of exchange payable on demand. Considered
as a bill of exchange, a draft is said to be, like the former, an open letter of request from, and an order by,
one person on another to pay a sum of money therein mentioned to a third person, on demand or at a future
time therein specified. As a matter of fact, the term "draft" is often used, and is the common term, for all bills
of exchange. And the words "draft" and "bill of exchange" are used indiscriminately.
On the other hand, a bill of exchange within the meaning of our Negotiable Instrument Law does not
operate as an assignment of funds in the hands of the drawee who is not liable on the instrument until he
accepts it. In other words, in order that a drawee may be liable on the draft and then become obligated to
the payee it is necessary that he first accepts the same. In fact, our law requires that with regard to drafts or
bills of exchange there is need that they be presented either for acceptance or for payment within a
reasonable time after their issuance or after their last negotiation thereof as the case may be. Failure to
make such presentment will discharge the drawer from liability or to the extent of the loss caused by the
delay.
Since it is admitted that the demand drafts herein involved have not been presented either for
acceptance or for payment, the inevitable consequence is that the appellee bank never had any chance of
accepting or rejecting them. Verily, appellee bank never became a debtor of the payee concerned and as
such the aforesaid drafts cannot be considered as credits subject to escheat within the meaning of the law.

But a demand draft is very different from a cashier's or manager's check, for it has been held that the
latter is a primary obligation of the bank which issues it and constitutes its written promise to pay upon
demand.

2. Yes.
The case, however, is different with regard to a telegraphic payment order. It is said that as the
transaction is for the establishment of a telegraphic or cable transfer, the agreement to remit creates a
contractual obligation and has been termed a purchase and sale transaction.
The purchaser of a telegraphic transfer upon making payment completes the transaction
insofar as he is concerned, though insofar as the remitting bank is concerned the contract is executory until
the credit is established. We agree with the following comment of the Solicitor General: "This is so because
the drawer bank was already paid the value of the telegraphic transfer payment order. In the particular cases
under consideration it appears in the books of the defendant bank that the amounts represented by the
telegraphic payment orders appear in the names of the respective payees. If the latter choose to demand
payment of their telegraphic transfers at the time the same was (were) received by the defendant bank,
there could be no question that this bank would have to pay them. Now, the question is, if the payees decide
to have their money remain for sometime in the defendant bank, can the latter maintain that the ownership
of said telegraphic payment orders is now with the drawer bank? The latter was already paid the value of the
telegraphic payment orders otherwise it would not have transmitted the same to the defendant bank. Hence,
it is absurd to say that the drawer banks are still the owners of said telegraphic payment orders.

FRANCISCO HERRERA vs. PETROPHIL CORPORATION

Facts:
On December 5, 1969, the plaintiff-appellant (Herrera) and ESSO Standard Eastern, Inc., (later
substituted by Petrophil Corporation) entered into a "Lease Agreement" whereby the former leased to the
latter a portion of his property for a period of twenty (20) years from said date, subject inter alia to the
following conditions:
Rental: The LESSEE shall pay the LESSOR a rental of P1.40 sqm. per month on 400 sqm. and are to be
expropriated later on (sic) or P560 per month and P1.40 per sqm. per month on 1,693 sqm. or
 P2,370.21 per month or a total of P2,930.20 per month 2,093 sqm. more or less, payable yearly in
advance within the 1st twenty days of each year; provided, a financial aid in the sum of P15,000 to
clear the leased premises of existing improvements thereon is paid in this manner; P10,000 upon
execution of this lease and P5,000 upon delivery of leased premises free and clear of improvements
thereon within 30 days from the date of execution of this agreement. The portion on the side of the
leased premises with an area of 365 sqm. more or less, will be occupied by LESSEE without rental
during the lifetime of this lease. PROVIDED FINALLY, that the Lessor is paid 8 years advance rental
based on P2,930.70 per month discounted at 12% interest per annum or a total net amount of
P130,288.47 before registration of lease. Leased premises shall be delivered within 30 days after 1st
partial payment of financial aid.”

Pursuant to the said contract, the defendant-appellee paid to the plaintiff-appellant advance rentals
for the first eight years, subtracting therefrom the amount of P101,010.73, the amount it computed as
constituting the interest or discount for the first eight years, in the total sum P180,288.47. On August 20,
1970, the defendant-appellee, explaining that there had been a mistake in computation, paid to the plaintiff-
appellant the additional sum of P2,182.70, thereby reducing the deducted amount to only P98,828.03.
On October 14, 1974, the plaintiff-appellant sued the defendant-appellee for the sum of P98,828.03,
with interest, claiming this had been illegally deducted from him in violation of the Usury Law. He also prayed
for moral damages and attorney's fees. In its answer, the defendant-appellee admitted the factual allegations
of the complaint but argued that the amount deducted was not usurious interest but a discount given to it
for paying the rentals in advance for eight years. Judgment on the pleadings was rendered for the defendant.

Issue: Whether or not Usury is applicable in the case at bar

Held: NO.
There is no usury in this case because no money was given by the defendant-appellee to the plaintiff-
appellant, nor did it allow him to use its money already in his possession. There was neither loan nor
forbearance but a mere discount which the plaintiff-appellant allowed the defendant-appellee to deduct
from the total payments because they were being made in advance for eight years. The discount was in effect
a reduction of the rentals which the lessor had the right to determine, and any reduction thereof, by any
amount, would not contravene the Usury Law.
The difference between a discount and a loan or forbearance is that the former does not have to be
repaid. The loan or forbearance is subject to repayment and is therefore governed by the laws on usury.
It has been held that the elements of usury are (1) a loan, express or implied; (2) an understanding
between the parties that the money lent shall or may be returned; (3) that for such loan a greater rate or
interest that is allowed by law shall be paid, or agreed to be paid, as the case may be; and (4) a corrupt intent
to take more than the legal rate for the use of money loaned. Unless these four things concur in every
transaction, it is safe to affirm that no case of usury can be declared.
As its title plainly indicates, the contract between the parties is one of lease and not of loan. It is
clearly denominated a "LEASE AGREEMENT." Nowhere in the contract is there any showing that the parties
intended a loan rather than a lease. The provision for the payment of rentals in advance cannot be construed
as a repayment of a loan because there was no grant or forbearance of money as to constitute an
indebtedness on the part of the lessor. On the contrary, the defendant-appellee was discharging its
obligation in advance by paying the eight years rentals, and it was for this advance payment that it was
getting a rebate or discount.
The provision for a discount is not unusual in lease contracts. As to its validity, it is settled that the
parties may establish such stipulations, clauses, terms and condition as they may want to include; and as long
as such agreements are not contrary to law, morals, good customs, public policy or public order, they shall
have the force of law between them.
 SAURA IMPORT & EXPORT CO., INC., vs. DEVELOPMENT BANK OF THE PHILIPPINES

Facts:
In July 1953 Saura, Inc applied to the Rehabilitation Finance Corporation (RFC), before its conversion
into DBP, for an industrial loan of P500,000.00, to be used as follows: P250,000.00 for the construction of a
factory building (for the manufacture of jute sacks); P240,900.00 to pay the balance of the purchase price of
the jute mill machinery and equipment; and P9,100.00 as additional working capital.
On January 7, 1954 RFC passed Resolution No. 145 approving the loan application for P500,000.00,
to be secured by a first mortgage on the factory buildings to be constructed, the land site thereof, and the
machinery and equipment to be installed.
Saura, Inc. was officially notified of the resolution on January 9, 1954. The day before, however,
evidently having otherwise been informed of its approval, Saura, Inc. wrote a letter to RFC, requesting a
modification of the terms laid down by it, namely: that in lieu of having China Engineers, Ltd. (which was
willing to assume liability only to the extent of its stock subscription with Saura, Inc.) sign as co-maker on the
corresponding promissory notes, Saura, Inc. would put up a bond for P123,500.00, an amount equivalent to
such subscription; and that Maria S. Roca would be substituted for Inocencia Arellano as one of the other co-
makers, having acquired the latter's shares in Saura, Inc.
In view of such request RFC approved Resolution No. 736 on February 4, 1954, designating of the
members of its Board of Governors, for certain reasons stated in the resolution, "to reexamine all the aspects
of this approved loan with special reference as to the advisability of financing this particular project based on
present conditions obtaining in the operations of jute mills, and to submit his findings thereon at the next
meeting of the Board.”
On March 24, 1954 Saura, Inc. wrote RFC that China Engineers, Ltd. had again agreed to act as co-
signer for the loan, and asked that the necessary documents be prepared in accordance with the terms and
conditions specified in Resolution No. 145 In connection with the re-examination of the project to be
financed with the loan applied for, as stated in Resolution No. 736, the parties named their respective
committees of engineers and technical men to meet with each other and undertake the necessary studies,
although in appointing its own committee Saura, Inc. made the observation that the same "should not be
taken as an acquiescence on (its) part to novate, or accept new conditions to, the agreement already entered
into," referring to its acceptance of the terms and conditions mentioned in Resolution No. 145.
It appears, however, that despite the formal execution of the loan agreement the re-examination
contemplated in Resolution No. 736 proceeded. In a meeting of the RFC Board of Governors on June 10,
1954, at which Ramon Saura, President of Saura, Inc., was present, it was decided to reduce the loan from
P500,000.00 to P300,000.00.
On June 19, 1954 another hitch developed. F.R. Halling, who had signed the promissory note for
China Engineers Ltd. jointly and severally with the other co-signers, wrote RFC that his company no longer
wished to avail of the loan and therefore considered the same cancelled as far as it was concerned. A follow-
up letter dated July 2 requested RFC that the registration of the mortgage be withdrawn.
In the meantime Saura, Inc. had written RFC requesting that the loan of P500,000.00 be granted. The
request was denied by RFC, which added in its letter-reply that it was "constrained to consider as cancelled
the loan of P300,000.00, in view of a notification from the China Engineers, Ltd., expressing their desire to
consider the loan cancelled insofar as they are concerned.”
On July 24, 1954 Saura, Inc. took exception to the cancellation of the loan and informed RFC that
China Engineers, Ltd. "will at any time reinstate their signature as co-signer of the note if RFC releases to us
the P500,000.00 originally approved by you.”
On December 17, 1954 RFC passed Resolution No. 9083, restoring the loan to the original amount of
P500,000.00, "it appearing that China Engineers, Ltd. is now willing to sign the promissory notes jointly with
the borrower-corporation," but with the following proviso:
That in view of observations made of the shortage and high cost of imported raw materials, the
Department of Agriculture and Natural Resources shall certify to the following:
 That the raw materials needed by the borrower-corporation to carry out its operation are available in
the immediate vicinity; and
That there is prospect of increased production thereof to provide adequately for the requirements of
the factory.”

The action thus taken was communicated to Saura, Inc. in a letter of RFC dated wherein it was
explained that the certification by the Department of Agriculture and Natural Resources was required "as the
intention of the original approval (of the loan) is to develop the manufacture of sacks on the basis of locally
available raw materials." This point is important, and sheds light on the subsequent actuations of the parties.
Saura, Inc. does not deny that the factory he was building in Davao was for the manufacture of bags from
local raw materials. The cover page of its brochure describes the project as a "Joint venture by and between
the Mindanao Industry Corporation and the Saura Import and Export Co., Inc. to finance, manage and
operate a Kenaf mill plant, to manufacture copra and corn bags, runners, floor mattings, carpets, draperies,
out of 100% local raw materials, principal kenaf." The explanatory note on page 1 of the same brochure
states that the venture "is the first serious attempt in this country to use 100% locally grown raw materials
notably kenaf which is presently grown commercially in the Island of Mindanao where the proposed jutemill
is located.”
This fact, according to defendant DBP, is what moved RFC to approve the loan application in the first
place, and to require, in its Resolution No. 9083, a certification from the Department of Agriculture and
Natural Resources as to the availability of local raw materials to provide adequately for the requirements of
the factory. Saura, Inc. itself confirmed the defendant's stand impliedly in its letter of January 21, 1955: (1)
stating that according to a special study made by the Bureau of Forestry "kenaf will not be available in
sufficient quantity this year or probably even next year;" (2) requesting "assurances (from RFC) that my
company and associates will be able to bring in sufficient jute materials as may be necessary for the full
operation of the jute mill;”
RFC replied stating that the unavailability of local raw materials in not in line with their principle in
approving the loan.
With the foregoing letter the negotiations came to a standstill. Saura, Inc. did not pursue the matter
further. Instead, it requested RFC to cancel the mortgage, and so, on June 17, 1955 RFC executed the
corresponding deed of cancellation and delivered it to Ramon F. Saura himself as president of Saura, Inc.
It appears that the cancellation was requested to make way for the registration of a mortgage
contract, executed on August 6, 1954, over the same property in favor of the Prudential Bank and Trust Co.,
under which contract Saura, Inc. had up to December 31 of the same year within which to pay its obligation
on the trust receipt heretofore mentioned. It appears further that for failure to pay the said obligation the
Prudential Bank and Trust Co. sued Saura, Inc. on May 15, 1955.
On January 9, 1964, almost 9 years after the mortgage in favor of RFC was cancelled at the request of
Saura, Inc., the latter commenced the present suit for damages, alleging failure of RFC (as predecessor of the
defendant DBP) to comply with its obligation to release the proceeds of the loan applied for and approved,
thereby preventing the plaintiff from completing or paying contractual commitments it had entered into, in
connection with its jute mill project.

Issue: Whether or not Petitioner is entitled to damages for the failure of RFC to comply with its obligation.

Held: NO.
We hold that there was indeed a perfected consensual contract, as recognized in Article 1934 of the
Civil Code, which provides:
"ART. 1954. An accepted promise to deliver something by way of commodatum or simple loan is
binding upon the parties, but the commodatum or simple loan itself shall not be perfected until the
delivery of the object of the contract.”
 There was undoubtedly offer and acceptance in this case: the application of Saura, Inc. for a loan of
P500,000.00 was approved by resolution of the defendant, and the corresponding mortgage was executed
and registered. But this fact alone falls short of resolving the basic claim that the defendant failed to fulfill its
obligation and that the plaintiff is therefore entitled to recover damages.
When RFC turned down the request in its letter of January 25, 1955 the negotiations which had been
going on for the implementation of the agreement reached an impasse. Saura, Inc. obviously was in no
position to comply with RFC's conditions. So instead of doing so and insisting that the loan be released as
agreed upon, Saura, Inc. asked that the mortgage be cancelled, which was done on June 15, 1955. The action
thus taken by both parties was in the nature of mutual desistance — what Manresa terms "mutuo
disenso" — which is a mode of extinguishing obligations. It is a concept that derives from the principle that
since mutual agreement can create a contract, mutual disagreement by the parties can cause its
extinguishment.
The subsequent conduct of Saura, Inc. confirms this desistance. It did not protest against any alleged
breach of contract by RFC, or even point out that the latter's stand was legally unjustified. Its request for
cancellation of the mortgage carried no reservation of whatever rights it believed it might have against RFC
for the latter's noncompliance. In 1962 it even applied with DBP for another loan to finance a rice and corn
project, which application was disapproved. It was only in 1964, nine years after the loan agreement had
been cancelled at its own request, that Saura, Inc. brought this action for damages. All these circumstances
demonstrate beyond doubt that the said agreement had been extinguished by mutual desistance — and that
on the initiative of the plaintiff-appellee itself.

RAOUL S.V. BONNEVIE and HONESTO V. BONNEVIE vs. THE HONORABLE COURT OF APPEALS

Facts:
It is not disputed that spouses Jose M. Lozano and Josefa P. Lozano were the owners of the property
which they mortgaged on December 6, 1966, to secure the payment of the loan in the principal amount of
P75,000.00 they were about to obtain from defendant-appellee Philippine Bank of Commerce; that on
December 8, 1966, they executed in favor of plaintiff-appellant the Deed of Sale with Assumption of
Mortgage, for and in consideration of the sum of P100,000.00, P20,000.00 of which amount being payable to
the Lozano spouses upon the execution of the document, and the balance of P75,000.00 being payable to
defendant-appellee; that on December 6, 1966, when the mortgage was executed by the Lozano spouses in
favor of defendant-appellee, the loan of P75,000.00 was not yet received by them, as it was on December 12,
1966 when they and their co-maker Alfonso Lim signed the promissory note for that amount; that from April
28, 1967 to July 12, 1968, plaintiff-appellant made payments to defendant-appellee on the mortgage in the
total amount of P18,944.22; that on May 4, 1968, plaintiff-appellant assigned all his rights under the Deed of
Sale with Assumption of Mortgage to his brother, intervenor Raoul Bonnevie; that on June 10, 1968,
defendant-appellee applied for the foreclosure of the mortgage, and notice of sale was published in the
Luzon Weekly Courier on June 30, July 7, and July 14, 1968; that auction sale was conducted on August 19,
1968, and the property was sold to defendant-appellee for P84,387.00; and that offers from plaintiff-
appellant to repurchase the property failed, and on October 9, 1969, he caused an adverse claim to be
annotated on the title of the property.
Honesto Bonnevie filed with the Court of First Instance against respondent Philippine Bank of
Commerce which sought the annulment of the Deed of Mortgage dated December 6, 1966 executed in favor
of the Philippine Bank of Commerce by the spouses Jose M. Lozano and Josefa P. Lozano as well as the
extrajudicial foreclosure made on September 4, 1968. It alleged among others that (a) the Deed of Mortgage
lacks consideration and (b) the mortgage was executed by one who was not the owner of the mortgaged
property. It further alleged that the property in question was foreclosed pursuant to Act No. 3135 as
amended, without, however, complying with the condition imposed for a valid foreclosure. Granting the
validity of the mortgage and the extrajudicial foreclosure, it finally alleged that respondent Bank should have
accepted petitioner's offer to redeem the property under the principle of equity and justice.
 On the other hand, the answer of defendant Banks, now private respondent herein, specifically
denied most of the allegations in the complaint and raised the following affirmative defenses: (a) that the
defendant has not given its consent, much less the requisite written consent, to the sale of the mortgaged
property to plaintiff and the assumption by the latter of the loan secured thereby; (b) that the demand
letters and notice of foreclosure were sent to Jose Lozano at his address; (c) that it was notified for the first
time about the alleged sale after it had foreclosed the Lozano mortgage; (d) that the law on contracts
requires defendant's consent before Jose Lozano can be released from his bilateral agreement with the
former and doubly so, before plaintiff may be substituted for Jose Lozano and Alfonso Lim; (e) that the loan
of P75,000.00 which was secured by mortgage, after two renewals remain unpaid despite countless
reminders and demands; (f) that the property in question remained registered in the name of Jose M. Lozano
in the land records of Rizal and there was no entry, notation or indication of the alleged sale to plaintiff; (g)
that it is an established banking practice that payments against accounts need not be personally made by the
debtor himself; and (h) that it is not true that the mortgage, at the time of its execution and registration, was
without consideration as alleged because the execution and registration of the securing mortgage, the
signing and delivery of the promissory note and the disbursement of the proceeds of the loan are mere
implementation of the basic consensual contract of loan.
After petitioner Honesto V. Bonnevie had rested his case, petitioner Raoul S.V. Bonnevie filed a
motion for intervention. The intervention was premised on the Deed of Assignment executed by petitioner
Honesto Bonnevie in favor of petitioner Raoul S.V. Bonnevie covering the rights and interests of petitioner
Honesto Bonnevie over the subject property.

Issue:
1. Whether the real estate mortgage executed by the spouses Lozano in favor of respondent bank
was validly and legally executed.
2. Whether the extrajudicial foreclosure of the said mortgage was validly and legally effected.
3. Whether petitioners had a right to redeem the foreclosed property.

Held:
1. YES
In attacking the validity of the deed of mortgage, they contended that when it was executed on
December 6, 1966 there was yet no principal obligation to secure as the loan of P75,000.00 was not
received by the Lozano spouses "so much so that in the absence of a principal obligation, there is
want of consideration in the accessory contract, which consequently impairs its validity and fatally
affects its very existence.”
This contention is patently devoid of merit. From the recitals of the mortgage deed itself, it is clearly
seen that the mortgage deed was executed for and on condition of the loan granted to the Lozano
spouses. The fact that the latter did not collect from the respondent Bank the consideration of the
mortgage on the date it was executed is immaterial. A contract of loan being a consensual contract,
the herein contract of loan was perfected at the same time the contract of mortgage was executed.
The promissory note executed on December 12, 1966 is only an evidence of indebtedness and does
not indicate lack of consideration of the mortgage at the time of its execution.

Petitioners also argued that granting the validity of the mortgage, the subsequent renewals of the
original loan, using as security the same property which the Lozano spouses had already sold to
petitioners, rendered the mortgage null and void.
This argument failed to consider the provision of the contract of mortgage which prohibits the sale,
disposition of, mortgage and encumbrance of the mortgaged properties, without the written consent
of the mortgagee, as well as the additional proviso that if in spite of said stipulation, the mortgaged
property is sold, the vendee shall assume the mortgage in the terms and conditions under which it is
 constituted. These provisions are expressly made part and parcel of the Deed of Sale with
Assumption of Mortgage.
Petitioners admit that they did not secure the consent of respondent Bank to the sale with
assumption of mortgage. Coupled with the fact that the sale/assignment was not registered so that
the title remained in the name of the Lozano spouses, insofar as respondent Bank was concerned,
the Lozano spouses could rightfully and validly mortgage the property. Respondent Bank had every
right to rely on the certificate of title. It was not bound to go behind the same to look for flaws in the
mortgagor's title, the doctrine of innocent purchaser for value being applicable to an innocent
mortgagee for value.

2. YES.
The lack of notice of the foreclosure sale on petitioners is a flimsy ground. Respondent Bank not
being a party to the Deed of Sale with Assumption of Mortgage, it can validly claim that it was not
aware of the same and hence, it may not be obliged to notify petitioners. Secondly, petitioner
Honesto Bonnevie was not entitled to any notice because as of May 14, 1968, he had transferred and
assigned all his rights and interests over the property in favor of intervenor Raoul Bonnevie and
respondent Bank was not likewise informed of the same. For the same reason, Raoul Bonnevie is not
entitled to notice. Most importantly, Act No. 3135 does not require personal notice on the
mortgagor.
In the case at bar, the notice of sale was published in the Luzon Courier on June 30, July 7 and July
14, 1968 and notices of the sale were posted for not less than twenty days in at least three (3) public
places in the Municipality where the property is located. Petitioners were thus placed on
constructive notice.

3. NO.
We hold that the Court of Appeals did not err in ruling that they had no right to redeem. No consent
having been secured from respondent Bank to the sale with assumption of mortgage by petitioners,
the latter were not validly substituted as debtors. In fact, their rights were never recorded and
hence, respondent Bank is charged with the obligation to recognize the right of redemption only of
the Lozano spouses. But even granting that as purchaser or assignee of the property, as the case may
be, the petitioners had acquired a right to redeem the property, petitioners failed to exercise said
right within the period granted by law. The certificate of sale in favor of appellee was registered on
September 2, 1968 and the one year redemption period expired on September 3, 1969. It was not
until September 29, 1969 that petitioner Honesto Bonnevie first wrote respondent and offered to
redeem the property. Moreover, on September 29, 1969, Honesto had at that time already
transferred his rights to intervenor Raoul Bonnevie.

CENTRAL BANK OF THE PHILIPPINES vs. THE HONORABLE COURT OF APPEALS

Facts:
On April 28, 1965, Island Savings Bank, upon favorable recommendation of its legal department,
approved the loan application for P80,000.00 of Sulpicio M. Tolentino, who, as a security for the loan,
executed on the same day a real estate mortgage over his 100-hectare land and which mortgage was
annotated on the said title the next day. The approved loan application called for a lump sum P80,000.00
loan, repayable in semi-annual installments for a period of 3 years, with 12% annual interest. It was required
that Sulpicio M. Tolentino shall use the loan proceeds solely as an additional capital to develop his other
property into a subdivision.
On May 22, 1965, a mere P17,000.00 partial release of the P80,000.00 loan was made by the Bank;
and Sulpicio M. Tolentino and his wife signed a promissory note for P17,000.00 at 12% annual interest,
payable within 3 years from the date of execution of the contract at semi-annual installments of P3,459.00,
An advance interest for the P80,000.00 loan covering a 6-month period amounting to P4,800.00 was
deducted from the partial release of P17,000.00. But this pre-deducted interest was refunded to Sulpicio M.
Tolentino on July 23, 1965, after being informed by the Bank that there was no fund yet available for the
release of the P63,000.00 balance. The Bank, thru its vice-president and treasurer, promised repeatedly the
release of the P63,000.00 balance.
On August 13, 1965, the Monetary Board of the Central Bank, after finding Island Savings Bank was
suffering liquidity problems, issued Resolution No. 1049, which provides that said bank is prohibited from
making new loans and investments excluding extensions or renewals of already approved loans subject to the
review of the Superintendent of Banks.
On June 14, 1968, the Monetary Board, after finding that Island Savings Bank failed to put up the
required capital to restore its solvency, issued Resolution No. 967 which prohibited Island Savings Bank from
doing business in the Philippines and instructed the Acting Superintendent of Banks to take charge of the
assets of Island Savings Bank.
On August 1, 1968, Island Savings Bank, in view of non-payment of the P17,000.00 covered by the
promissory note, filed an application for the extra-judicial foreclosure of the real estate mortgage covering
the 100-hectare land of Sulpicio M. Tolentino.
On January 20, 1969, Sulpicio M. Tolentino filed a petition with the Court of First Instance of Agusan
for injunction, specific performance or rescission and damages with preliminary injunction, alleging that since
Island Savings Bank failed to deliver the P63,000.00 balance of the P80,000.00 loan, he is entitled to specific
performance by ordering Island Savings Bank to deliver the P63,000.00 with interest of 12% per annum from
April 28, 1965, and if said balance cannot be delivered, to rescind the real estate mortgage.
On January 29, 1969, the trial court admitted the answer in intervention praying for the dismissal of
the petition of Sulpicio M. Tolentino and the setting aside of the restraining order, filed by the Central Bank
and by the Acting Superintendent of Banks.
On February 15, 1972, the trial court, after trial on the merits, rendered its decision, finding
unmeritorious the petition of Sulpicio M. Tolentino.

Issue:
1. Whether or not the action for specific performance can prosper
2. Whether or not Suplicio Tolentino is liable for the P17,000 debt covered by the promissory note
3. Whether or not his real estate mortgage may be foreclosed to satisfy the said amount
Held:
1. NO.
When Island Savings Bank and Sulpicio M. Tolentino entered into an P80,000.00 loan agreement on
April 28, 1965, they undertook reciprocal obligations. In reciprocal obligations, the obligation or
promise of each party is the consideration for that of the other; and when one party has performed
or is ready and willing to perform his part of the contract, the other party who has not performed or
is not ready and willing to perform incurs in delay (Art. 1169 of the Civil Code). The promise of
Sulpicio M. Tolentino to pay was the consideration for the obligation of Island Savings Bank to
furnish the P80,000.00 loan. When Sulpicio M. Tolentino executed a real estate mortgage on April
28, 1965, he signified his willingness to pay the P80,000.00 loan. From such date, the obligation of
Island Savings Bank to furnish the P80,000.00 loan accrued. Thus, the Bank's delay in furnishing the
entire loan started on April 28, 1965, and lasted for a period of 3 years or when the Monetary Board
of the Central Bank issued Resolution No. 967 on June 14, 1968, which prohibited Island Savings
Bank from doing further business. Such prohibition made it legally impossible for Island Savings Bank
to furnish the P63,000.00 balance of the P80,000.00 loan.
Since Island Savings Bank was in default in fulfilling its reciprocal obligation under their loan
agreement, Sulpicio M. Tolentino, under Article 1191 of the Civil Code, may choose between specific
performance or rescission with damages in either case. But since Island Savings Bank is now
 prohibited from doing further business by Monetary Board Resolution No. 967, WE cannot grant
specific performance in favor of Sulpicio M. Tolentino.
Rescission is the only alternative remedy left. WE rule, however, that rescission is only for
the P63,000.00 balance of the P80,000.00 loan, because the bank is in default only insofar as such
amount is concerned, as there is no doubt that the bank failed to give the P63,000.00.

2. YES.
As far as the partial release of P17,000.00, which Sulpicio M. Tolentino accepted and executed a
promissory note to cover it, the bank was deemed to have complied with its reciprocal obligation to
furnish a P17,000.00 loan. The promissory note gave rise to Sulpicio M. Tolentino's reciprocal
obligation to pay the P17,000.00 loan when it falls due. His failure to pay the overdue amortizations
under the promissory note made him a party in default, hence not entitled to rescission (Article 1191
of the Civil Code). If there is a right to rescind the promissory note, it shall belong to the aggrieved
party, that is, Island Savings Bank. If Tolentino had not signed a promissory note setting the date for
payment of P17,000.00 within 3 years, he would be entitled to ask for rescission of the entire loan
because he cannot possibly be in default as there was no date for him to perform his reciprocal
obligation to pay.
Since both parties were in default in the performance of their respective reciprocal
obligations, that is, Island Savings Bank failed to comply with its obligation to furnish the entire loan
and Sulpicio M. Tolentino failed to comply with his obligation to pay his P17,000.00 debt within 3
years as stipulated, they are both liable for damages.
Article 1192 of the Civil Code provides that in case both parties have committed a breach of
their reciprocal obligations, the liability of the first infractor shall be equitably tempered by the
courts. WE rule that the liability of Island Savings Bank for damages in not furnishing the entire loan
is offset by the liability of Sulpicio M. Tolentino for damages, in the form of penalties and surcharges,
for not paying his overdue P17,000.00 debt. The liability of Sulpicio M. Tolentino for interest on his
P17,000.00 debt shall not be included in offsetting the liabilities of both parties. Since Sulpicio M.
Tolentino derived some benefit for his use of the P17,000.00, it is just that he should account for the
interest thereon.

3. WE hold, however, that the real estate mortgage of Sulpicio M. Tolentino cannot be entirely
foreclosed to satisfy his P17,000.00 debt.
The fact that when Sulpicio M. Tolentino executed his real estate mortgage, no consideration was
then in existence, as there was no debt yet because Island Savings Bank had not made any release on
the loan, does not make the real estate mortgage void for lack of consideration. It is not necessary
that any consideration should pass at the time of the execution of the contract of real mortgage. It
may either be a prior or subsequent matter. But when the consideration is subsequent to the
mortgage, the mortgage can take effect only when the debt secured by it is created as a binding
contract to pay. And, when there is partial failure of consideration, the mortgage becomes
unenforceable to the extent of such failure. Where the indebtedness actually owing to the holder of
the mortgage is less than the sum named in the mortgage, the mortgage cannot be enforced for
more than the actual sum due.
 REPUBLIC OF THE PHILIPPINES vs. BAGTAS

Facts:
On 8 May 1948 Jose V. Bagtas borrowed from the Republic of the Philippines through the Bureau of
Animal Industry three bulls: a Red Sindhi with a book value of P1,176.46, a Bhagnari, of P1,320.56 and a
Sahiniwal, of P744.46, for a period of one year from 8 May 1948 to 7 May 1949 for breeding purposes subject
to a government charge of breeding fee of 10% of the book value of the bulls.
pon the expiration on 7 May 1949 of the contract, the borrower asked for a renewal for another
period of one year. However, the Secretary of Agriculture and Natural Resources approved a renewal thereof
of only one bull for another year from 8 May 1949 to 7 May 1950 and requested the return of the other two.
On 25 March 1950 Jose V. Bagtas wrote to the Director of Animal Industry that he would pay the
value of the three bulls. On 17 October 1950 he reiterated his desire to buy them at a value with a deduction
of yearly depreciation to be approved by the Auditor General. On 19 October 1950 the Director of Animal
Industry advised him that the book value of the three bulls could not be reduced and that they either be
returned or their book value paid not later than 31 October 1950. Jose V. Bagtas failed to pay the book value
of the three bulls or to return them.
So, on 20 December 1950 in the Court of First Instance of Manila the Republic of the Philippines
commenced an action against him praying that he be ordered to return the three bulls loaned to him or to
pay their book value in the total sum of P3,241.45 and the unpaid breeding fee in the sum of P499.62, both
with interests, and costs.
On 5 July 1951 Jose V. Bagtas, that because of the bad peace and order situation and of the pending
appeal he had taken to the Secretary of Agriculture and Natural Resources and the President of the
Philippines from the refusal by the Director of Animal Industry to deduct from the book value of the bulls
corresponding yearly depreciation of 8% from the date of acquisition, to which depreciation the Auditor
General did not object, he could not return the animals nor pay their value and prayed for the dismissal of
the complaint.
After hearing, on 30 July 1956 the trial court rendered judgment in favor of the plaintiff.
On 9 October 1958 the plaintiff moved ex parte for a writ of execution which the court granted on 18
October and issued on 11 November 1958.
On 2 December 1958 it granted an ex-parte motion filed by the plaintiff on 28 November 1958 for
the appointment of a special sheriff to serve the writ outside Manila.
Of this order appointing a special sheriff, on 6 December 1958 Felicidad M. Bagtas, the surviving
spouse of the defendant Jose V. Bagtas who died on 23 October 1951 and as administratrix of his estate, was
notified.
On 7 January 1959 she filed a motion alleging that on 26 June 1952 the two bulls, Sindhi and
Bhagnari, were returned to the Bureau of Animal Industry and that sometime in November 1953 the third
bull, the Sahiniwal, died from gunshot wounds inflicted during a Huks raid on Hacienda Felicidad Intal, and
praying that the writ of execution be quashed and that a writ of preliminary injunction be issued. On 31
January 1959 the plaintiff objected to her motion. On 6 February 1959 she filed a reply thereto. On the same
day, 6 February, the Court denied her motion. Hence, this appeal certified by the Court of Appeals to this
Court.
The appellant contends that the Sahiniwal bull was accidentally killed during a raid by the Huks in
November 1953 upon the surrounding barrios of Hacienda Felicidad Intal, Baggao, Cagayan, where the
animal was kept, and that as such death was due to force majeure she is relieved from the duty of the
returning the bull or paying its value to the appellee. The appellant contends that the contract
was commodatum and that, for that reason, as the appellee retained ownership or title to the bull it should
suffer its loss due to force majeure.
Issue: Whether or not defendant should pay for the value of the third bull

Held: Yes.
A contract of commodatum is essentially gratuitous. If the breeding fee be considered a
compensation, then the contract would be a lease of the bull. Under article 1671 of the Civil Code the lessee
would be subject to the responsibilities of a possessor in bad faith, because she had continued possession of
the bull after the expiry of the contract. And even if the contract be commodatum, still the appellant is liable,
because article 1942 of the Civil Code provides that a bailee in a contract of commodatum:
is liable for loss of the thing, even if it should be through a fortuitous event:
(2) If he keeps it longer than the period stipulated.
(3) If the thing loaned has been delivered with appraisal of its value, unless there is a stipulation
exempting the bailee from responsibility in case of a fortuitous event.

The original period of the loan was from 8 May 1948 to 7 May 1949. The loan of one bull was
renewed for another period of one year to end on 8 May 1950. But the appellant kept and used the bull until
November 1953 when during a Huk raid it was killed by stray bullets. Furthermore, when lent and delivered
to the deceased husband of the appellant the bulls had each an appraised book value, to wit: the Sindhi, at
P1,176.46; the Bhagnari, at P1,320.56 and the Sahiniwal; at P744.46. It was not stipulated that in case of loss
of the bull due to fortuitous event the late husband of the appellant would be exempt from liability.

As the appellant already had returned the two bulls to the appellee, the estate of the late defendant
is only liable for the sum of P859.63, the value of the bull which has not been returned to the appellee,
because it was killed while in the custody of the administratrix of his estate. This is the amount prayed for by
the appellee in its objection on 31 January 1959 to the motion filed on 7 January 1959 by the appellant for
the quashing of the writ of execution.

ALEJANDRA MINA, ET AL. vs. RUPERTA PASCUAL

Facts:
Francisco Fontanilla and Andres Fontanilla were brothers. Francisco Fontanilla acquired during his
lifetime a lot in the center of the town of Laoag the property having been awarded to him through its
purchase at a public auction held by the alcalde mayor of that province. The lot has a frontage of 120 meters
and a depth of 15.
Andres Fontanilla, with the consent of his brother Francisco, erected a warehouse on a part of the
said lot, embracing 14 meters of its frontage by 11 meters of its depth.
Francisco Fontanilla, the former owner of the lot, being dead, the herein plaintiffs, Alejandra Mina et
al., were recognized without discussion as his heirs.
Andres Fontanilla, the former owner of the warehouse, also having died, the children of Ruperta
Pascual were recognized likewise without discussion, though it is not said how, and consequently are entitled
to the said building, or rather, as Ruperta Pascual herself stated, to only six-seventh of one-half of it, the
other half belonging, as it appears, to the plaintiffs themselves, and the remaining one-seventh of the first
one-half to the children of one of the plaintiffs, Elena de Villanueva. The fact is that the plaintiffs and the
defendants are virtually, to all appearance, the owners of the warehouse; while the plaintiffs are
undoubtedly the owners of the part of the lot occupied by that building, as well also as of the remainder
thereof.
This was the state of affairs when, on May 6, 1909, Ruperta Pascual, as the guardian of her minor
children, the herein defendants, petitioned the Court of First Instance for authorization to sell "the six-
sevenths of the one-half of the warehouse, of 14 by 11 meters, together with its lot." The plaintiffs — that is,
Alejandra Mina et al. — opposed the petition of Ruperta Pascual for the reason that the latter had included
therein the lot occupied by the warehouse, which they claimed was their exclusive property.
The plaintiffs did more than oppose Pascual's petition; they requested the court, through motion,
decide the question of the ownership of the lot before it pass upon the petition for the sale of the
warehouse. But the court, before determining the matter of the ownership of the lot occupied by the
warehouse, ordered the sale of this building.
So, the warehouse, together with the lot on which it stands, was sold to Cu Joco, the other
defendant in this case.
The plaintiffs insisted upon a decision of the question of the ownership of the lot, and the court
decided it by holding that this land belonged to the owner of the warehouse which had been built thereon
thirty years before.
The plaintiffs appealed and this court reversed the judgment of the lower court and held that the
appellants were the owners of the lot in question.

An agreement was had as to the facts, the ninth paragraph of which is as follows:
"9. That the herein plaintiffs excepted to the judgment and appealed therefrom to the Supreme Court
which found for them by holding that they are owners of the lot in question, although there existed
and still exists a commodatum by virtue of which the guardianship (meaning the defendants) had and
has the use, and the plaintiffs the ownership, of the property, with no finding concerning the decree
of the lower court that ordered the sale.”

Issue:
1. Whether or not there was a valid sale.
2. Whether or not there exists a commodatum between Petitioner Mina and Pascual
Held:
1. NO.
What is essentially pertinent to the case is the fact that the defendants agree that the plaintiffs have
the ownership, and they themselves only the use, of the said lot.
On this premise, the nullity of the sale of the lot is in all respects quite evident, whatsoever be the
manner in which the sale was effected, whether judicially or extrajudicially.
He who has only the use of a thing cannot validly sell the thing itself. The effect of the sale being a
transfer of the ownership of the thing, it is evident that he who has only the mere use of the thing
cannot transfer its ownership. The sale of a thing effected by one who is not its owner is null and
void. The defendants never were the owners of the lot sold. The sale of it by them is necessarily null
and void. One cannot convey to another what he has never had himself.
The purchaser could not acquire anything more than the interest that might be held by a person to
whom realty in possession of the vendor might be sold, for at a judicial auction nothing else is
disposed of. What the minor children of Ruperta Pascual had in their possession was the ownership
of the six-sevenths part of one-half of the warehouse and the use of the lot occupied by this building.
This, and nothing more, could the Chinaman Cu Joco acquire at that sale: not the ownership of the
lot; neither the other half, nor the remaining one-seventh of the said first half, of the warehouse.
Consequently, the sale made to him of this one-seventh of the one-half and the entire other half of
the building was null and void, and likewise with still more reason the sale of the lot the building
occupies.

2. NO.
although both litigating parties may have agreed in their idea of the commodatum, on account of its
not being, as indeed it is not, a question of fact but of law, yet that denomination given by them to
the use of the lot granted by Francisco Fontanilla to his brother, Andres Fontanilla, is not acceptable.
 Contracts are not to be interpreted in conformity with the name that the parties thereto agree to
give them, but must be construed, duly considering their constitute elements, as they are defined
and denominated by law.
"By the contract of loan, one of the parties delivers to the other, either anything not perishable, in
order that the latter may use it during a certain period and return it to the former, in which case it
called commodatum.”
It is, therefore, an essential feature of the commodatum that the use of the thing belonging to
another shall be for a certain period. Francisco Fontanilla did not fix any definite period of time
during which Andres Fontanilla could have the use of the lot whereon the latter was to erect a stone
warehouse of considerable value, and so it is that for the past thirty years the lot has been used by
both Andres and his successors in interest. The present contention of the plaintiffs that Cu Joco, now
in possession of the lot, should pay rent for it at the rate of P5 a month, would destroy the theory of
the commodatum sustained by them, since, according to the second paragraph of the aforecited
article 1740, "commodatum is essentially gratuitous," and, if what the plaintiffs themselves aver on
page 7 of their brief is to be believed, it never entered Francisco's mind to limit the period during
which his brother Andres was to have the use of the lot, because he expected that the warehouse
would eventually fall into the hands of his son, Fructuoso Fontanilla, called the adopted son of
Andres, which did not come to pass for the reason that Fructuoso died before his uncle Andres. With
that expectation in view, it appears more likely that Francisco intended to allow his brother Andres a
surface right; but this right supposes the payment of an annual rent, and Andres had the gratuitous
use of the lot.
Hence, as the facts aforestated only show that a building was erected on another's ground, the
question should be decided in accordance with the statutes that, thirty years ago, governed
accessions to real estate, and which were Laws 41 and 42, title 28, of the third Partida, nearly
identical with provisions of articles 361 and 362 of the Civil Code. So, then, pursuant to article 361,
the owner of the land on which a building is erected in good faith has a right to appropriated such
edifice to himself, after payment of the indemnity prescribed in articles 453 and 454, or to oblige the
builder to pay him the value of the land. Such, and no other, is the right to which the plaintiffs are
entitled.

CATHOLIC VICAR APOSTOLIC OF THE MOUNTAIN PROVINCE vs. COURT OF APPEALS

Facts:
The documents and records presented reveal that the whole controversy started when the
defendant Catholic Vicar Apostolic of the Mountain Province (VICAR for brevity) filed with the Court of First
Instance an application for registration of title over Lots 1, 2, 3, and 4, situated at Poblacion Central, La
Trinidad, Benguet, said Lots being the sites of the Catholic Church building, convents, high school building,
school gymnasium, school dormitories, social hall, stonewalls, etc.
On March 22, 1963 the Heirs of Juan Valdez and the Heirs of Egmidio Octaviano filed their
Answer/Opposition on Lots Nos. 2 and 3, respectively, asserting ownership and title thereto. After trial on the
merits, the land registration court promulgated its Decision, dated November 17, 1965, confirming the
registrable title of VICAR to Lots 1, 2, 3, and 4.
The Heirs of Juan Valdez and the Heirs of Egmidio Octaviano appealed the decision of the land
registration court to the then Court of Appeals. The Court of Appeals rendered its decision reversing the
decision of the land registration court and dismissing the VICAR's application as to Lots 2 and 3, the lots
claimed by the two sets of oppositors in the land registration case, the first lot being presently occupied by
the convent and the second by the women's dormitory and the sisters' convent.
On May 9, 1977, the Heirs of Octaviano filed a motion for reconsideration praying the Court of
Appeals to order the registration of Lot 3 in the names of the Heirs of Egmidio Octaviano, and on May 17,
1977, the Heirs of Juan Valdez and Pacita Valdez filed their motion for reconsideration praying that both Lots
2 and 3 be ordered registered in the names of the Heirs of Juan Valdez and Pacita Valdez. On August 12,
1977, the Court of Appeals denied the motion for reconsideration filed by the Heirs of Juan Valdez on the
ground that there was "no sufficient merit to justify reconsideration one way or the other . . .," and likewise
denied that of the Heirs of Egmidio Octaviano.
Thereupon, the VICAR filed with the Supreme Court a petition for review on certiorari of the decision
of the Court of Appeals dismissing his (its) application for registration of Lots 2 and 3.
From the denial by the Court of Appeals of their motion for reconsideration, the Heirs of Juan Valdez
and Pacita Valdez, on September 8, 1977, filed with the Supreme Court a petition for review.
On January 13, 1978, the Supreme Court denied in a minute resolution both petitions (of VICAR on
the one hand and the Heirs of Juan Valdez and Pacita Valdez on the other) for lack of merit. Upon the finality
of both Supreme Court resolutions, the Heirs of Octaviano filed with the then Court of First Instance a Motion
For Execution of Judgment praying that the Heirs of Octaviano be placed in possession of Lot 3. The Court,
presided over by Hon. Salvador J. Valdez, on December 7, 1978, denied the motion on the ground that the
Court of Appeals decision did not grant the Heirs of Octaviano any affirmative relief.
On February 7, 1979, the Heirs of Octaviano filed with the Court of Appeals a petition for certiorari
and mandamus. In its decision dated May 16, 1979, the Court of Appeals dismissed the petition.

Issue: Whether or not petitioner is a bailee in commodatum

Held: YES.
Private respondents were able to prove that their predecessors' house was borrowed by petitioner
Vicar after the church and the convent were destroyed. They never asked for the return of the house, but
when they allowed its free use, they became bailors in commodatum and the petitioner the bailee. The
bailees' failure to return the subject matter of commodatum to the bailor did not mean adverse possession
on the part of the borrower. The bailee held in trust the property subject matter ofcommodatum. The
adverse claim of petitioner came only in 1951 when it declared the lots for taxation purposes. The action of
petitioner Vicar by such adverse claim could not ripen into title by way of ordinary acquisitive prescription
because of the absence of just title.
The Court of Appeals found that the predecessors-in-interest and private respondents were
possessors under claim of ownership in good faith from 1906; that petitioner Vicar was only a bailee
in commodatum; and that the adverse claim and repudiation of trust came only in 1951.
Petitioner was in possession as borrower in commodatum up to 1951, when it repudiated the trust
by declaring the properties in its name for taxation purposes. When petitioner applied for registration of Lots
2 and 3 in 1962, it had been in possession in concept of owner only for eleven years. Ordinary acquisitive
prescription requires possession for ten years, but always with just title. Extraordinary acquisitive
prescription requires 30 years.

MARGARITA QUINTOS vs. BECK.

Facts:
The defendant was a tenant of the plaintiff and as such occupied the latter's house on M. H. del Pilar
street, No. 1175. On January 14, 1936, upon the novation of the contract of lease between the plaintiff and
the defendant, the former gratuitously granted to the latter the use of the furniture described in the third
paragraph of the stipulation of facts, subject to the condition that the defendant would return them to the
plaintiff upon the latter's demand.
The plaintiff sold the property to Maria Lopez and Rosario Lopez and on September 14, 1936, these
three notified the defendant of the conveyance, giving him sixty days to vacate the premises under one of
the clauses of the contract of lease.
 There after the plaintiff required the defendant to return all the furniture transferred to him for his
use. The defendant answered that she may call for them in the house where they are found. On November 5,
1936, the defendant, through another person, wrote to the plaintiff reiterating that she may call for the
furniture in the ground floor of the house. On the 7th of the same month, the defendant wrote another letter
to the plaintiff informing her that he could not give up the three gas heaters and the four electric lamps
because he would use them until the 15th of the same month when the lease is due to expire. The plaintiff
refused to get the furniture in view of the fact that the defendant had declined to make delivers of all of
them. On November 15th, before vacating the house, the defendant deposited with the Sheriff all the
furniture belonging to the plaintiff and they are now on deposit in the warehouse situated at No. 1521, Rizal
Avenue in the custody of the said sheriff.

Issue: Whether or not the defendant has complied with his obligation which will make plaintiff bound to
pay for the deposit fees.

Held: NO.
The contract entered into between the parties is one of commodatum, because under it the plaintiff
gratuitously granted the use of the furniture to the defendant, reserving for herself the ownership thereof;
by this contract the defendant bound himself to return the furniture to the plaintiff, upon the latter's
demand.
The obligation voluntarily assumed by the defendant to return the furniture upon the plaintiff's
demand, means that he should return all of them to the plaintiff at the latter's residence or house. The
defendant did not comply with this obligation when he merely placed them at the disposal of the plaintiff,
retaining for his benefit the three gas heaters and the four electric lamps.
As the defendant had voluntarily undertaken to return all the furniture to the plaintiff, upon the
latter's demand, the Court could not legally compel her to bear the expenses occasioned by the deposit of
the furniture at the defendant's behest. The latter, as bailee, was not entitled to place the furniture on
deposit; nor was the plaintiff under a duty to accept the offer to return the furniture, because the defendant
wanted to retain the three gas heaters and the four electric lamps.
The costs in both instances should be borne by the defendant because the plaintiff is the prevailing
party (section 487 of the Code of Civil Procedure). The defendant was the one who breached the contract
of commodatum, and without any reason he refused to return and deliver all the furniture upon the
plaintiff's demand. In these circumstances, it is just and equitable that he pay the legal expenses and other
judicial costs which the plaintiff would not have otherwise defrayed.